Some important accounting terms - 1

Some important accounting terms

Before embarking upon this wonderful journey of accounts, let us understand some important terms which will be very much needed to proceed further. These will be explained in my next few posts :-

Transaction

A transaction is an event which can be expressed in terms of money and which brings change in the financial position of a business enterprise. In every transaction there is a movement of value from one source to another. For example, when goods are purchased for cash, there is a movement of goods from the seller to the buyer and a movement of money from the buyer to the seller. Transactions may be external (between a business entity and a second party, for example, goods sold on credit to X) or internal (does not involve second party, e.g., depreciation charged on machinery).

Capital

Capital is the amount of money invested by the owner in his business. The money is spent to buy things which the business unit needs to carry on its trade. For example, capital may be used to buy buildings and machinery.

 In accounting, what a business is worth is called capital. It is the difference between the total assets and total liabilities of the business unit. Capital can be brought in by a person into the business in different forms - cash or kind. When capital is brought in the form of cash, it is spent on various items of assets that make the business a going concern.

   The capital of a business can be increased when the owner -
i) brings in more capital to the business unit; and/or
ii) does not withdraw the entire profit for an accounting period.

  When the owner brings in further capital to his business, the amount is credited to the Capital Account. Likewise, the net profit for an accounting period is credited to the Capital Account. If the drawings are less than the net profit, the capital is increased by the difference.

Drawings

Drawings are assets (money or goods) withdrawn by the owner(s) of a business unit (other than a company).
Drawings thus appear in the accounts of sole traders and partnerships. Drawings are generally made in anticipation of profits.
    Since a withdrawal of cash reduces the owner's capital it could be recorded by debiting Capital Account.Generally, a separate account is opened called Drawings Account to record all withdrawals by the owner.
  Debits to the drawing account are required for any of the following transactions :-
a) Withdrawals of cash
b) Withdrawal of goods, for example, the owner of a clothing store may use some clothes for his personal use or use of the family members. The debit to the Drawings Account would be for the cost of the goods withdrawn for personal use.
c) Payment of the owner's personal bills out of business cash/bank. For example, personal club bill paid from business bank account.

To be continued....

Introduction on Accounting

Meaning of Accounting

Accounting may be defined as the process of collecting, recording, summarising and communicating financial information. Accounting is an art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are , in part at least, of a financial character, and interpreting the results thereof. 

In short, accounting is the basic tool for recording and reporting economic transactions that affect business enterprises.

Branches of accounting

1. Financial Accounting :- It is that part of accounting which is mainly concerned with the historical, custodial and stewardship aspects of external reporting to shareholders, government and other users of accounting information outside the business entity. It is the recording and processing of financial data affecting the business unit, which relates to the past and generally for one year.

2. Cost Accounting :- It is mainly concerned with the cost to produce goods and services. Cost accounting applies the principles of accounting in such a manner that it is possible to have a detailed recording and analysis of expenditure incurred in connection with the operation of any business, for example, manufacturing, administration or selling, or the production of an article so that it is able to measure performance and control activities.

3. Management Accounting :- Any form of accounting which enables a business unit to be conducted more efficiently can be regarded as management accounting. Management accounting is that part of accounting which is concerned mainly with internal reporting to the managers of a business unit. It refers to planning, control and decision - making which is useful to the management in the discharge of its functions.

Note:- This blog will mainly deal with financial accounting and its various applications.

A basic intro!!!!

Hi everyone,

My name is Somapa Mitra. I have done my B.Com(hons.) in Accounting and Finance from St. Xavier's College, Kolkata and have also completed my Masters in Commerce from the same college this year. I have given NET this year and waiting for my results. I am also preparing for different competitive examinations. My love for accounts has prompted me to start this blog. 

There are many people who are studying accounts and who have an interest in accounts. Some people are not from commerce background but still need to know about basic accounting in their area of work. Through this blog, I will be providing a basic idea of different topics of accounting in an easy and simple way so that everyone can understand. This blog will be particularly helpful to those who have just started studying commerce, specially in the school level, and also those who have an interest in accounts but don't know from here to start. So, lets start this journey and I hope it will be a learning experience for all of us.